Telstra admits competition will slow subscriber growth

By David Ramli

April 7, 2014 — 9.05am

Telstra chief executive David Thodey has admitted the company's meteoric mobile subscriber growth will start to drop off over the next 12 months amid rising competition from rivals SingTel-Optus and Vodafone Australia.

But analysts believe the company will continue to enjoy strong earnings and profit growth thanks to a new round of cost-cutting and recent asset sales.

Telstra's mobile service division is one of the company's most important units and generated revenues of $4.9 billion in the first half of 2013-14 alone. The number of customers using Telstra mobile services grew by 739,000 during the period to hit 15.8 million subscribers.

This was in stark contrast with the 606,000 subscribers that left Vodafone Australia over the same period and the 134,000 users who left Optus in the 12 months ending December 2013.

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Mr Thodey told The Australian Financial Review he was pleased with the company's strong performance in the mobile space and that the company had won market share against its rivals.

"I still remain optimistic over the next two to three years there will continue to be growth," he said. "[However], no we wouldn't expect the same sort of level [of subscriber growth].

"My view on the market firstly is that there will continue to be growth in the market as people use wearables and some will have SIM cards in them."

Mr Thodey also said the average revenue per user (ARPU) statistic used to determine the profitability of mobile customers was no longer the best measure for success.

"ARPU was a very good measure when you were looking at voice and data services," he said. "What we really look at is revenue and profit growth ... and cash generation so that's probably more interesting as we go forward."

However Bank of America Merrill Lynch research analyst Sameer Chopra told clients in a note that Telstra would enjoy strong overall growth thanks in part to its program of cutting costs and staff numbers.

He predicted Telstra would save $600 million through productivity improvements in 2013-14 followed by an extra $600 million in 2014-15. Salary expenses would peak at $4.48 billion in the current financial year before falling to $4.28 billion in 2015-16.

He also said Telstra's earnings before interest, taxation, depreciation and amortisation margins could rise over the next two years as the company moved customer service online and streamlined its businesses to cut costs.

Credit Suisse analyst Fraser McLeish said a renewed push by rivals would begin to pay off over the next 12 months, but added that the whole industry would benefit from rising mobile revenue.

Vodafone Australia has repeatedly offered new customers a doubling of their monthly download data allowance while SingTel chief executive Chua Sock Koong told analysts Optus would work to increase its mobile subscriber base.

"It's going to become harder to win more market share because Vodafone and to some extent Optus have been investing in their networks and closing the gap [with Telstra]," Mr McLeish said. "Vodafone has got some reasonably attractive pricing propositions out there so there'll be limited opportunity for Telstra.

"But we do expect market revenue growth to improve and ARPUs to pick up as customers use more data, particularly as they shift to 4G and go onto higher pricing plans."

Telstra is currently the dominant player in the mobile service market. It has 15.8 million subscribers compared to the 5 million at Vodafone Australia and 9.43 million at Optus.

The company has said it will invest around $1.2 billion each year for at least the next two years on its mobile network to stave off rising competition despite claims from rivals that it will only generate marginal gains.